RBI Governor Y V Reddy on Wednesday assured bankers that the Reserve Bank of India is closely monitoring the interest rate and inflation-related developments in the financial markets.
He was chairing a meeting of RBI officials with select bankers and representatives of industry associations such as the IBA, PDAI, Fimmda and Fedai.
At the meeting, bankers asked the RBI to calibrate its liquidity management moves with the Market Stabilisation Scheme and the central and state borrowing programmes --including a review of the schedule.
RBI was asked to ensure a gradual retraction of the liquidity overhang so as to provide comfort to the participants.
Participants said they preferred shorter-duration new issues by the government, floating rate bonds and capital indexed bonds.
Bankers also raised concerns over the classification and valuation of their investment portfolios, which get mauled in times of volatility, adversely affecting their balance sheet.
They suggested that these be addressed urgently, taking account of the uniquely Indian stipulation of 25 per cent statutory liquidity ratio.
They asked the RBI to take some "speed breaker" measures through the OMO window. And when the yields fell rapidly, they wanted the central bank to consider an approach similar to when the yields are rising rapidly.
Any such operation should be only to provide comfort of liquidity at the market determined rates consistent with yield curve.
Reddy reiterated the importance accorded to the primary objective of maintaining price stability and consequently containing inflationary expectations, while giving due consideration to growth in output and employment.
The participants felt that there is considerable merit in continuing to give weight to stability at this juncture to meet not only the current concerns in the bond and money markets, but also to avoid the prospects of inducing stagflation in as much as a significant reason for current hike in WPI is due to supply shock.
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